USD/JPY Forecast: Hawkish Yellen…the last best hope for BOJ

Tired of seeing a comatose Dollar-Yen pair? So are we. The patience would pay off once Yellen’s comments from Jackson Hole start hitting the wires.

For more than a week now, the pair has been restricted largely to a narrow range of 100.00 – 100.71. Trading volumes have been thin on account of summer lull. Add to that caution ahead of Yellen speech. No wonder tracking Dollar-Yen pair made eye lids feel so heavy.

BOJ’s last best hope is hawkish Yellen

BOJ has run out of ammo… the bank knows it and currency traders know it. There is little that the central bank or the Japanese government can do to weaken Yen other than hope the Fed would talk up rate hike bets. Time and again, over the last couple of months, we have been saying that it is the Fed (2-yr yield) which has to do the heavy lifting.

Little scope for outright hawkish stance

However, Yellen has little room to come out massively hawkish. We know that her closest associates at the Fed – Fischer and Dudley are in favor of rate hikes. In that sense, Yellen lags behind and may do a catch up job today, but an explicit hint at a rate hike in December is unlikely given the Fed would not want to rock the boat ahead of US elections. On the other hand, an outright dovish turn is unlikely as well.

Mildly dovish Yellen could be enough to lift USD/JPY pair

This is because the bullish sentiment on Yen appears overstretched. Even Mrs. Watanabe, known for contrarian trades, has been wary of taking long dollar positions, which in itself suggests the sentiment is one sided. Usually in such cases the markets tend to move against the consensus.

However, neutral/data dependent stance would be game over for the Yen bears. In this case, USD/JPY could re-test Brexit day low.

Technicals – It’s either 50-DMA or monthly 100-MA

Daily Chart

• Mildly hawkish to hawkish Yellen could trigger an upside break above 100.71 (50% of 2011 low – 2015 high), in which case the spot could target 50-DMA level of 102.75 over the next week.
• On the other hand, dovish/neutral/data dependent stance could trigger a drop towards monthly 100-MA level of 96.80. Note, we have already had a bearish point and figure breakout earlier this week as discussed here on Monday.
• Also note the overstretched bullish sentiment on Yen long means even a mildly hawkish tone could be enough for USD/JPY rally. However, other majors are likely to hold ground against the dollar, thus Yen crosses could see a bigger rally.  

 

AUD/USD – Long-term falling trend line stands exposed on dovish Yellen

Monthly chart

• The bird could test supply around long-term falling trend line resistance seen around 0.7810 levels.
• As of now, bulls appear to have run out of steam after having retreated from the recent high of 0.7760, however, the rising trend line from May low and July low is still intact. In case, Yellen talks up rate hike bets, the rising trend line could be breached.

 

NZD/USD – Price-Volume divergence

Daily Chart

• Yesterday’s bearish inverted hammer candle on the daily chart marked another failure to hold above 0.73 handle.
• The high yielding NZD has been on the rampage after having bottomed out at 06951 levels on July 21. However, volumes have been weak.
• FXCM’s real volume indicator shows a clear negative divergence with price. The rally from Aug 9 low of 0.7110 has been accompanied by falling volumes. No wonder, the currency pair has had a tough time extending/holding gains above 0.73 handle.
• This forces us to think if the next move in the spot is to the downside, although dovish Yellen could trigger an upside break in which case 0.75 handle could be put to test over the next week.
• The reaction to hawkish/mildly hawkish Yellen could be exaggerated; courtesy of repeated failure in the range of 0.73-0.7350.